Labour under fire as US economy returns to growth

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Larry Elliott, Guardian,

Nov 24 2009, 18:33 ist

updated: Nov 24 2009, 18:34 ist

Highlighting the UK’s sluggishness after an unprecedented six straight quarters of falling output, data released showed the world’s biggest economy expanding at an annualised pace of 3.5 per cent in the third quarter of 2009.

The news from Washington provided a fillip to global stockmarkets, with the Dow Jones industrial average finishing the day more than 199 points up in New York and London’s FTSE 100 reversing early falls to record a 57.3 point gain by the close of business. Sterling rose against both the dollar and the euro on the foreign exchanges.

The US becomes the fourth G7 country after Germany, Japan and France to emerge from recession amid evidence that the Obama administration’s financial support for the housing market and “cash for clunkers” provided a boost to spending in the three months to September. Third-quarter data for Italy and Canada will be released shortly and is expected to show growth in both countries.

Gordon Brown remains hopeful that low interest rates, higher spending and tax cuts will lead to a solid revival in the economy over the coming months, but both major opposition parties seized on the US data as evidence that Britain was lagging behind its rivals.

George Osborne, the Shadow Chancellor, said: “These figures are very good news for the world economy, but Britain now stands out as the only major economy still in recession. Gordon Brown’s claim that we were ‘best placed’ now lies in tatters. His recession plan has failed. The rest of the world is moving on and we are left behind.”Vince Cable, the Liberal Democrat Treasury spokesman, said: “The UK is now one of the last major developed countries still in recession. We are now paying the price for a massive overreliance on the banking sector and a bubble in housing and personal debt which went unchecked by the prime minister for years.

“The recovery we are now seeing in the US is in a good part down to the positive action the Obama administration has taken to support jobs and build up the country’s infrastructure. The return to growth in the US is in stark contrast to the UK and is clear evidence that the billions poured into a meaningless VAT cut has failed.”

A breakdown of the US GDP figures released by the commerce department in Washington showed that spending on durable goods rose by 22.3 per cent in the third quarter, helped by the financial incentives for Americans to trade in their old cars for new models.

A separate US government scheme — the first-time homebuyers’ tax credit — was seen by Wall Street as a key factor behind a 23.4 per cent jump in residential investment, the first increase in housebuilding since the start of America’s real estate slump more than four years ago.

The treasury secretary, Timothy Geithner, and the housing and urban development secretary, Shaun Donovan, backed plans to have the tax credit extended for a limited period beyond the current cut-off date of 1 December, and to broaden its scope so that more families could apply.

The Obama administration delivered a $787bn (£476bn) stimulus package earlier this year but believes the economy remains fragile despite the third-quarter data. “For every person out of work, for every family facing foreclosure, for every small business facing a credit crunch, the recession remains alive and acute,” Geithner told the senate’s finance committee.

Paul Ashworth,senior US economist at Capital Economics, said the growth data from the US was “good news” that was likely to spill over into next year. “However, without a sustained and meaningful contribution from consumption, this recovery is ultimately doomed to disappoint.”

Charles Dumas, economist at Lombard Street Research, said the boost to the US economy was flattered by a hefty drop in the savings ratio, which fell from 4.9 per cent to 3.3 per cent in the third quarter.

Real personal disposable income fell by 3.5 per cent but consumers borrowed more to finance their spending. “With government debt also soaring, the US recovery is driven by the return of high leverage,” Dumas said.

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